Voya Intermediate Bond Fund Quarterly Commentary - 4Q25

The final quarter of 2025 opened under the shadow of the government shutdown, which had implications for both financial markets and the broader economy. With key agencies shuttered, official data on labor markets and inflation was delayed, leaving policymakers and investors to rely on secondary indicators. This lack of transparency complicated the U.S. Federal Reserve’s decision-making and injected uncertainty into financial markets. While the shutdown’s direct economic impact was modest, it weighed on sentiment and marginally dampened activity. 

Credit markets faced additional turbulence, driven by high-profile bankruptcies and aggressive capital spending trends. Tricolor, a subprime auto lender specializing in loans to undocumented immigrants and borrowers with limited credit history, filed for Chapter 7 in September amid allegations of double-pledging loans in its warehouse lines. Later in the month, First Brands Group—a major auto parts supplier—collapsed under the weight of tariffs, as well as its own malfeasance. Meanwhile, the quarter was marked by a surge in corporate investment in AI and data center infrastructure. Issuers tapped both public and private debt markets to fund these initiatives, leading to heavy new issuance throughout the quarter.

Corporate credit spreads widened sharply from historically tight levels before retracing as supply pressures eased. While spreads finished roughly unchanged, the episode sparked debate over whether exuberance in AI-related spending could signal the beginnings of a bubble, a theme that will likely persist into 2026. 

Trade policy remained a simmering backdrop rather than a flashpoint. Negotiations and retaliatory measures persisted, particularly with China, but escalation was muted compared to earlier in the year. Still, tariffs and uncertainty around future trade dynamics influenced corporate decision-making and filtered through to labor and inflation trends. When official data finally arrived post-shutdown, it confirmed a softening labor market: October payrolls fell by over 100,000 jobs, while November added just 64,000. While government layoffs drove much of the weakness, private-sector gains were modest, reinforcing a narrative of slowing momentum. Inflation, though elevated, showed no signs of acceleration, giving the Fed marginal room to act. After one rate cut in 3Q25, policymakers delivered two more in 4Q25, citing a policy rate above neutral and labor market fragility, while signaling caution around future easing plans. 

Against this backdrop, fixed-income markets delivered mixed but generally positive performance. Front-end rates declined in response to Fed easing, while longer maturities held steady, reflecting persistent growth and inflation expectations. Credit sectors delivered modest excess returns, with higher-yielding securitized products outperforming corporates. Residential mortgage-backed securities (RMBS) (both agency and non-agency) were standout performers, buoyed by expectations of improved housing activity and faster prepayment speeds. For investors, the quarter reinforced the value of diversification and disciplined risk management amid a landscape where policy uncertainty, idiosyncratic credit events, and thematic trends like AI spending continue to shape opportunities and risks. 

For the quarter, the Fund marginally underperformed the Index, on a NAV basis. With an underweight in Treasuries in favor of credit, sector allocation decisions contributed to relative performance, with our allocation to non-agency RMBS being the largest individual contributor. Similarly, our overweight to agency mortgage-backed securities (MBS), which was tactically adjusted throughout the quarter, was also a strong contributor. However, this was counterbalanced by our security selection choices in agency MBS, since our collateralized mortgage obligations (CMOs) holdings did not keep pace with the performance experienced in pools—an outcome that is common during such a robust rally. Finally, duration and yield curve positions had limited impact on relative performance, as we maintained a mostly neutral position throughout the quarter.

As we look ahead to 2026, our outlook is relatively constructive, even as spreads remain tight. We expect growth to push above trend, supported by easier financial conditions that should unlock a long-awaited housing recovery after years of stagnation. While labor market softness and lingering tariff effects remain notable headwinds, these will likely be offset by pro-business policies, including tax cuts and deregulation. Importantly, we believe this growth will not reignite inflation. The last inflation surge was driven primarily by fiscal stimulus, and a repeat of that dynamic appears unlikely. Additionally, corporations face diminished pricing power as wage growth has cooled and consumers, burdened by cumulative price increases, are much more cost sensitive. 

Labor market dynamics will remain a key theme. Job growth should stay muted in the near term, reflecting cyclical weakness and elevated policy uncertainty. However, structural constraints—lower immigration and declining labor force participation—will limit downside pressure on wages, even as unemployment remains elevated. This points to a period of “jobless growth,” where output expands without a hiring boom. 

AI will continue to dominate the narrative. Companies are investing heavily in AI capabilities and infrastructure, driving significant issuance in debt markets. While AI promises long-term productivity gains—potentially lifting annual growth by up to 1.5 percentage points—the slow realization of these benefits will periodically challenge valuations. We do not see an AI bubble today, but the scale of capital formation and the uncertainty around returns underscore the importance of disciplined security selection and underwriting.

Central banks remain pivotal. Among developed markets, the Fed stands out as one of the only central banks likely to continue cutting rates. Despite inflation remaining above target, the Fed views its current policy rate as above neutral and aims to prevent further labor market weakness. That said, we expect the Fed to continue to tread carefully. While Fed Chair Jerome Powell’s term ends in May and his successor will likely align more closely with the administration, meaningful influence will be constrained by the Federal Open Market Committee (FOMC) structure.

In fixed income markets, elevated yields present compelling opportunities despite tight spreads. We continue to favor shorter spread duration, which offer attractive carry while limiting exposure to spread widening. Discounted non-agency RMBS stand out as a high-conviction idea, poised to continue to outperform if housing rebounds as expected, and prepayment speeds pick up. Meanwhile, as inflation concerns continue to wane, duration should remain an effective hedge against risk assets, particularly at the front end which is more sensitive to Fed policy. Overall, we continue to view the current environment as the “golden age of income”—one where disciplined positioning and security selection can deliver strong risk-adjusted returns.